00:01
So here we have a lottery, right? and the lottery can be described something like this.
00:05
You can get $100, you can get a $50, or you can get $10, and the probabilities are 0 .1, 0 .2, and 0 .7.
00:18
So the expected value, the expected value of this random variable is equal to the sum of the probabilities times the outcomes.
00:26
So we've got a 10 % chance of getting 100.
00:30
We've got a 20 % chance of getting 50.
00:32
We've got a 70 % chance of getting 10.
00:35
So the expected value is 10 plus 10 plus 7 is equal to 27, right? this in c is also what a risk neutral person would pay.
00:49
Because this is what you're going to get out, right? so if you pay less than 27 on average and you get to play this lottery many times, on average you're going to make money, right? the risk person doesn't care about risk, so they don't care about the fact that you might win or you might lose.
01:07
They only care about the expected value.
01:10
So the average outcome of this lottery is $27, which is what a risk -neutral person would pay.
01:17
We now need to calculate the variance, and the variance is the sum of the probabilities...